It is generally acknowledged that the global economy is far from achieving a sustainable process of development in the sense of being able to meet present needs without compromising the ability of future generations to meet their own needs. Particularly over the past fifty years, global economic activity has resulted not only in growth in real incomes but also in serious environmental depletion and degradation. The principal underlying cause of continuing envi- ronmental damage has been that market processes do not reflect environmental costs and benefits. In many cases, the hidden environmental costs in the commodity sector are passed on to the general population, for example through polluted air or water supplies, or to taxpayers through the cost of land recla- mation after mining has ended.
Governments therefore need to devise mechanisms, where these do not at present exist, to internalize the environmental costs of economic activities, par- ticularly for those which have adverse environmental effects. Such mechanisms could include, for example, taxes on the production of items harmful to the environment, or the removal or reduction of existing subsidies on inputs, such
as fertilizers and pesticides, which also have harmful effects. Conversely, financial incentives could be introduced for environmentally friendly activities.
It is now generally accepted that poverty in developing countries is a major cause of environmental damage (for example to forests). Poverty alleviation policies should thus help to meet environmental goals in many developing countries, with consequent benefits for developed countries also. Equally, some changes in developed countries’ policies, such as reductions in existing trade barriers, would help to raise the commodity export earnings of developing countries, thus providing more resources and more flexibility for these countries to deal with problems of economic and social development, including poverty and environmental issues. Increased capital inflows, by assisting economic growth in developing countries, could also contribute to the attainment of envi- ronmental objectives. To the extent that supply management for commodities in excess supply can improve depressed levels of commodity prices, it could also be expected to reduce the pressure on environmental resources.
A number of natural products exported by developing countries have envi- ronmental advantages over their synthetic competitors. The world market for environmentally friendly natural products could be significantly expanded if developing countries took steps to promote the environmental attractiveness of their natural commodity exports.
CONCLUSION
The main points that arise from the above discussion of the problems of commodity-dependent countries are the following.
1. A high dependence on exports of primary commodities has been a major handicap to the efforts of developing countries, and particularly of the poorest among them, to promote their economic and social progress.
2. Since 1980, the dominant feature of world commodity markets has been their persistently depressed price levels, with consequent large terms-of- trade losses for commodity-exporting countries. These losses have played a major part in the rise in their foreign debts and the decline in their growth rates and in their standards of living. The low-income and least developed countries have been worst affected.
3. Over this period, also, international action to strengthen the commodity sector of developing countries’ economies has been marginal or non-existent.
4. There is now a strong case for a new international initiative to deal effec- tively with the commodity issue in all its aspects. This should be a cooperative effort by developing and developed countries in the longer- term interests of both. Such cooperative action, to be fully effective, should
include both free-market instruments and selected forms of market inter- vention, where appropriate, in dealing with specific commodity problems.
5. The various pricing problems facing commodity-dependent countries must not be conflated. Short-, medium- and long-term pricing problems have distinct causes and require distinct remedial policies.
6. A new initiative in the commodities field should give priority to raising the present depressed levels of prices of the major commodities exported by developing countries. Supply management measures would be needed to reduce excessive stocks ‘overhanging’ a commodity market, combined, as appropriate, with measures to promote diversification away from com- modities in persistent oversupply, or with additional measures to improve the technical characteristics of natural materials in competition with synthetics or other substitutes. Developed countries could support a new initiative on these lines by negotiating substantial reductions, and eventual elimination, of the various barriers to commodity imports, including tariff escalation on processed commodities from developing countries.
7. For commodities whose markets are subject to multi-year price cycles, con- sideration should be given to adopting the type of production management now being developed for cocoa. Where the main problem continues to be excessive short-term price fluctuations, the use of risk-management techniques will, no doubt, spread more widely, though it seems unlikely that they will come into general use by commodity producers and traders in developing countries for many years to come. There is, thus, a case for instituting, as soon as practicable, a detailed review of the scope, efficacy and cost of this approach, which could be used to minimize the adverse effects of excessive short-term price fluctuations of the commodity exports of developing countries.
8. Governments need to devise mechanisms, where these do not at present exist, to internalize the environmental costs of economic activities. Poverty alleviation policies in developing countries should also help to meet envi- ronmental goals. These countries could expand their export market if they took steps to promote the environmental attractiveness of their natural commodity exports.
NOTES
1. In this chapter, the terms ‘commodities’ and ‘primary commodities’ are used interchange- ably, and exclude petroleum, which is best treated as a special case.
2. Over the decade of the 1980s the fall in real commodity prices was some 45 per cent, if the fall in real commodity prices is deflated by the United Nations Index of unit values of man- ufactures exported by developed countries, or about 35 per cent, if an index of commodity export unit values is used instead of the commodity price index.
3. The UNCTAD index of free market commodity prices fell by 11 per cent between the first halves of 1997 and 1998, and by a further 17 per cent between the first halves of 1998 and 1999 (UNCTAD, 1999).
4. Maizels et al. (1997).
5. A more detailed discussion of postwar international commodity policies can be found in Maizels (1992, pp. 101–55).
6. The IPC resolution also specified a number of longer-term objectives, including improve- ment in market access, diversification of production and improved competitiveness of natural products competing with synthetics.
7. For example, setting the price ranges to be defended at levels inconsistent with market trends, and allocating insufficient funds to finance buffer stock operations.
8. Recent estimates by the World Bank (1998/99, p. 24) put the level of real commodity prices in the year 2007 at 16 per cent below the 1998 average, almost all of the decline being due to a projected rise of 17 per cent in the unit value of manufactures exported by the G8 countries.
9. An international buffer stock, as used in many past commodity agreements, is more suitable for reducing short-term price fluctuations.
10. There is an inverse relationship between the export tax rate required to yield a given rate of increase in export revenue and the short-term price elasticity of supply, so that as the latter approaches zero the required tax rate rises sharply, for a given demand elasticity.
11. An export tax is likely to divert supplies from export to the domestic market in this case.
12. This point is also made in the chapter by Binswanger and Lutz in the present volume.
13. The Agreement establishing the Common Fund for Commodities (1980) specified that commodity development measures under its Second Account ‘shall include research and development, productivity improvements, marketing and measures designed to assist ... vertical diversification’ (Art. 18.3(a)).
14. Common Fund for Commodities (1999).
15. The commitment of $11–12 million a year represents only about 0.02 per cent of the approx- imately $50 billion of annual exports of natural raw materials from developing countries in the mid-1990s. By contrast, research and development expenditures by the large synthetic materials enterprises of developed countries are often above 5 per cent of the value of production.
16. UNCTAD (1993).
17. This stabilizing influence of international buffer stocks was strongly emphasized by J.M.
Keynes (1942) in his famous wartime proposals for the postwar international economic and financial institutions.
REFERENCES
Common Fund for Commodities (1999), ‘Notes on the common fund for commodities’, Amsterdam, 2 June.
Keynes, J.M. (1942), ‘The international regulation of primary products’, reprinted in D. Moggridge (ed.) (1980), Collected Writings of John Maynard Keynes, London:
Macmillan and Cambridge University Press.
Maizels, A. (1992), Commodities in Crisis, Oxford: Clarendon Press.
Maizels, A., R. Bacon and G. Mavrotas (1997), Commodity Supply Management by Producing Countries, Oxford: Clarendon Press.
UNCTAD (1993). Fifth International Cocoa Agreement, 1993, Geneva: United Nations.
UNCTAD (1999), Monthly Commodity Price Bulletin, XIX/7, Geneva: United Nations.
World Bank (1998/99). Global Economic Prospects and the Developing Countries, Washington, DC: World Bank, p. 24.
10. Income distribution and development
Frances Stewart
INTRODUCTION1
The distribution of income within a society is of enormous importance. It influences the cohesion of the society and, for any given level of GDP, determines its poverty level. Some relatively high-income economies have very unequal income distribution, with the result that there are large cleavages in society and high levels of poverty, as in Brazil. Other countries with more equal income distribution have less poverty and there is a sense of fairness within the society which makes for political stability, as in Costa Rica. The sensitivity of poverty to growth depends on a country’s income distribution; for example, a 1 per cent growth rate of GDP leads to a 0.21 per cent reduction in poverty in Zambia, if distribution is unchanged, compared with a 3.4 per cent reduction in Malaysia (Sen, 1995). There is also considerable evidence that the distribu- tion of income has a significant influence on the rate of growth, with more equal societies growing faster than less equal ones. Moreover, the average health status of a society depends on its income distribution, so that countries with more unequal distributions experience lower life expectancy.2An equitable distribution of income, as well as the achievement of social goals, are, therefore, essential aspects of development, over and above economic growth.
This chapter aims to explore the connections between income distribution and economic growth, and to identify some policy conclusions emerging from the analysis. There have been many investigations of the relationship between income distribution and development, starting with a classic paper by Kuznets, who argued that income distribution was generally relatively equal at low levels of income in the early stages of development, became more unequal as devel- opment proceeded, and finally a reverse move took place so that income distribution became more equal again as countries approached the levels of incomes of the developed countries. The work of Kuznets, and others, was based on the finding of correlations between levels and growth of per capita income and income distribution. Behind these correlations lie two possible types of causality: first, how growth affects the distribution of income; and secondly, how distribution affects growth. Both will be investigated, before exploring recent trends in income distribution.
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The chapter is organized as follows: section I considers some important def- initional issues; section II reviews findings on the ways in which growth affects income distribution; section III looks at the reverse causality, that is, how income distribution affects growth; section IV discusses growth strategies which are likely to generate more equal income distribution; section V reviews recent trends in income distribution; section VI explores wider dimensions of inequality extending beyond pre-tax private incomes, to encompass the incidence of taxation and expenditure, and some indicators of inequalities in capabilities; section VII discusses horizontal (or group) inequalities; section VIII briefly reviews changes in global income distribution; and, finally, section IX concludes.